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Our House View

The House View process provides a consistent macroeconomic framework to analysing global financial markets. It creates a clear forward-looking strategic direction for all of our investment decisions, particularly asset allocation within the traditional balanced funds but it also underpins our absolute return strategies. The House View is formed by the Global Investment Group (GIG) on the basis of internal research from the Global Strategy Team, covering a range of macro-economic, behavioural, liquidity and structural drivers in each of the major economies and markets. The GIG consists of representatives from both Standard Life Investments and Aberdeen Asset Management but its views only apply in the context of Standard Life Investments funds.

ECB easing has driven European yields to unattractive levels and political risks remain heightened. US credit spreads are now tight and provide little protection should Treasury yields increase further.

Underweight

High Yield Debt

US bonds no longer offer attractive returns relative to Treasuries on a risk-adjusted basis. European spreads fail to provide sufficient value.

Macroeconomic conditions and tax cuts, which will continue to boost company profits, support the market. Large domestic exposure lessens the impact of any trade tensions.

Overweight

European Equities

Broad-based economic expansion and stronger trade flows support corporate profits. Euro appreciation continues to restrain interest in European stocks and peripheral political risks remain but the market is inexpensive.

Overweight

Japanese Equities

The market looks attractive as easy monetary policy and fiscal stimulus are helped by efforts to improve corporate governance, share buybacks and business investment. However, yen strength periodically remains a concern.

The UK real estate cycle is at a mature stage and expectations of further capital growth are limited. Income remains attractive, although risks are elevated should conditions turn recessionary or political uncertainty grows.

Neutral

Europe

Stronger economic growth and low levels of new supply support European property. The ECB’s policy stance also supports valuations.

Overweight

North America

The US market has low vacancies across most sectors and markets, although the sizeable retail sector is coming under more pressure.

Neutral

Asia Pacific

An attractive yield margin remains, but yields have bottomed in most markets. Income returns are driven by modest rental growth on the back of low vacancies and healthy tenant demand.

The major currencies are within normal valuation ranges. The yen acts as a diversifier against the risk of a decline in global activity. Long-term factors support the euro but technical factors are a headwind.

Overweight ¥, Underweight £, €, $

Global Commodities

While the slow improvement in global growth supports commodities, they are very sensitive to Chinese policy tightening and some commodities, such as oil, face an uncertain demand/supply balance.

Key Issues

The world economy looks set to grow quite robustly in 2018, but the differences between faster and slower growing countries are becoming more apparent. The most positive news comes from the US, where tax cuts, government spending and more confident businesses supporting employment and investment all suggest a strong recovery into the summer and solid growth into 2019. On the other hand, Europe and China are seeing slower growth, if still quite solid by past standards. The Chinese government has begun to tackle some of its debt burden, while political uncertainty in Italy is affecting EU business sentiment. Businesses in both countries are concerned about the possible fallout from the more protectionist noises that emanate from the White House - even if the sums involved are not yet large enough to impact sharply on activity.

Despite this backdrop, we still see a favourable outlook for corporate profits, as revenue growth and productivity gains offset rising costs. As long as inflation remains low, and hence central bank tightening remains moderate, then a pro-risk approach is indicated. The House View is overweight in global equity markets, with the exceptions of developed Asia, given concerns about the potential extent of China’s slowdown, and the UK, where political uncertainty is undermining business profitability.

Fixed income markets are responding to a variety of signals: tariffs talk, political stress, and mixed reports about the pace of economic growth and inflation in the various economies. We are still wary about most bond markets; the Federal Reserve has indicated that it will tighten monetary policy steadily, and the ECB has announced that quantitative easing will end in 2018 and interest rates rise in 2019. Our portfolios are underweight in most government bonds, on valuation grounds, except some European peripheral markets. We prefer inflation-linked bonds as a precaution against any inflation surge.

Within commercial real estate, we have taken steps to neutralise our positions across all the major regions. Although global property remains an attractive asset class in a world of moderate growth, valuations mean that the bulk of future returns should come from rents. We maintain a small overweight position in European ex-UK REITs, as the region should benefit as the domestic economic growth environment improves. Generally, we prefer offices and logistics to the retail sector, which remains under structural pressure from the inexorable rise of e-commerce.

Among the major currencies, we hold a small overweight position in the Japanese yen and favour underweight positions in sterling, the US dollar and the euro. This partly reflects cross-border capital flows, partly valuation measures, and partly to act as a diversifier. For example, the yen usually benefits when investor uncertainty falls and provides protection due to its characteristics as a longer duration asset.

Where foresight meets conviction

Whatever your involvement in the financial markets, you will understand that they present ongoing, never-ending challenges. That’s why we’re focused firmly on the future - anticipating and identifying the next compelling investment opportunities for our clients.

Our House View provides a clear, forward-looking strategic direction for our investment decisions. It’s the crux of all our investment insights, taking into account the many factors that shape the outlook for the major asset classes. It ensures we have a consistent approach to managing market risk across our product range, and acts as a bedrock for the decisions our investment teams take on a daily basis.

How the process works

The Global Investment Group remains focused on a pro-cyclical stance favouring risk assets. However, as valuations have become more extended and the economic cycle has matured, portfolios have sought diversification in specific asset classes.